A guide to SaaS MRR & ARR

➡️ What is MRR & ARR?

MRR stands for Monthly Recurring Revenue

ARR stands for Annual recurring revenue

That means customers contractually agreed to use your product on a recurring basis

➡️ What’s so great about MRR & ARR?

💰 High margins - COGS are often times limited to hosting, and customer support. Higher margins = more money to invest in SG&A

💰 High predictability - when customers are charged on a recurring basis, your predictability goes up. Similarly, when customers are committed for a full year, it becomes very difficult to churn mid year

💰 Favorable cash position - ARR often times means cash is collected upfront…as with any organization, especially with a startup, cash is KING

💰 Simple accounting - With the right tools in place, reconciling deferred revenue is a breeze

It’s no surprise then that SaaS MRR and ARR Startups receive some of the highest valuations out there

➡️ How do you calculate MRR & ARR?

Well...the simple answer is to sum up the monthly contract amounts

but that will only get you ENDING MRR / ARR

It’s important to also understand the MOVEMENTS in MRR / ARR…

Here’s the most common formula to use

Opening MRR / ARR

➕ New MRR / ARR→ This is added MRR from new customers

➖ Churn MRR / ARR→ This is lost MRR from existing customers who have opted out entirely

➕ Expansion MRR / ARR→ This is added MRR from existing customers

➖ Contraction MRR / ARR → This is lost MRR from existing customers who are still active, but at a reduced rate

➡️ How can you forecast MRR / ARR?

Well, it’s actually pretty simple

If you know what % of your opening MRR / ARR each month is going to the above buckets (new, churn, expansion, contraction)…

You can then add similar projections to get to a reasonable estimate of MRR / ARR

Got anything else to add about SaaS MRR & ARR?

And that was the guide to SaaS MRR & ARR